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Ask Dr. Don

Stock stash loses cash

Dear Dr. Don,
I am losing money on my IRA because of the downward spiral in stock prices. How can I move my money into a different IRA type or savings? I just don't want to lose any more money. Is there any penalty in changing, or will I have to pay taxes to change?
Johnny Jericho

Dear Johnny,
As long as you keep the money invested in an IRA, there aren't tax consequences from changing how the account is invested. You can move out of stock investments into bonds, money market investments or even bank certificates of deposit without tax or penalty.

Before you consider changing firms, look into the changes that may be possible within your existing account. Talk to the account provider to find out what they offer besides stock mutual funds.

If you can't get comfortable with the choices offered by your current account provider, then moving your IRA from one account to another is a fairly straightforward process.

The most common mistake is to cash out the existing account by accepting a check for the balance. When you do that the balance will be subject to mandatory withholding of 20 percent.

Fully funding the new account then requires you to come up with the amount of the withholding or else the withholding is treated as a distribution subject to income taxes, plus a 10 percent tax penalty if it is an early distribution. You're also under some time pressure. You only have 60 days to fund the new account from the date the check is cut.

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Instead of getting a check, you should do a direct transfer into the new account. It's easiest to figure out where you want to invest, and then have a representative of that firm request a direct transfer from the account that you're closing into your new IRA account.

The longer you have until retirement, the less sense it makes to turn your back on stocks. Stock investors have had a hard time of it over the past three years, and there is no guarantee that things will get better anytime soon, but keeping some exposure to stocks makes sense when you're investing for the long haul. The three-year and five-year annualized returns on the S&P 500 Index are negative, but the 10-year annualized return is still about 9 percent.

You could move to bond investments only to find out that the Federal Reserve is at the end of an easing cycle and interest rates are headed higher. Higher interest rates mean lower bond prices and lower returns for bond funds. The bull market in bonds may be nearing an end. You want to avoid buying high and selling low in the bond market, just as you would in the stock market.

What's the answer? Diversify your investments between stocks, bonds and cash. As you close in on retirement you should reduce risk in your portfolio but still have a part of your investments that offers you an opportunity for returns greater than the inflation rate.

Treasury Inflation Indexed securities can be a good choice in tax-advantaged retirement accounts as a conservative substitute for stock investments because this investment is indexed to changes in the inflation rate as measured by the Consumer Price Index.

Don't be afraid to hire a fee-based financial planner to help you sort through where to invest. He can help you avoid decisions made by looking backward and fighting the last war rather than looking forward toward meeting your financial needs in retirement.

-- Posted: Oct. 24, 2002

Read more Dr. Don columns
See Also
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